Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2014-12-16 Number: 14-154/VIII Author-Name: Paul Koster Author-Workplace-Name: VU University Amsterdam, the Netherlands Author-Name: Stefanie Peer Author-Workplace-Name: Vienna University of Business and Economics, Austria Author-Name: Thijs Dekker Author-Workplace-Name: University of Leeds, United Kingdom Title: Memory, Expectation Formation and Scheduling Choices Abstract: This discussion paper led to a publication in 'Economics of Transportation'
. Limited memory capacity, retrieval constraints and anchoring are central to expectation formation processes. We develop a model of adaptive expectations where individuals are able to store only a finite number of past experiences of a stochastic state variable. Retrieval of these experiences is probabilistic and subject to error. We apply the model to scheduling choices of commuters and demonstrate that memory constraints lead to sub-optimal choices. We analytically and numerically show how memory-based adaptive expectations substantially increase commuters' willingness-to-pay for reductions in travel time variability, relative to the rational expectations outcome. Classification-JEL: A12, D84, R41 Keywords: Memory, Transience, Expectation formation, Adaptive expectations, Retrieval Accuracy, Scheduling, Value of Reliability File-Url: http://papers.tinbergen.nl/14154.pdf File-Format: application/pdf File-Size: 415938 bytes Handle: RePEc:tin:wpaper:20140154